100% Expensing for Qualified Production Property: IRS Provides Key Details on the OBBBA Deduction

Additional guidance for special depreciation allowance on Qualified Production Property

The IRS released Notice 2026-16, which gives businesses a more detailed roadmap for claiming a new special depreciation allowance for qualified production property (QPP). At a high level, the allowance aims to encourage U.S. production investment by allowing a 100% first-year deduction for eligible qualifying property while Treasury and the IRS work on proposed regulations.

The leaders of our Tax Practice have analyzed the guidance and created a brief summary of the most critical aspects of the allowance.

What this allowance does

Section 168(n), enacted as part of Public Law 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA), allows manufacturers, refiners, agricultural producers, and chemical producers to immediately expense certain nonresidential real property rather than recover those costs over 39 years.

Key requirements to qualify

Below is a summary of the key requirements from the notice that a property must meet to qualify for immediate expensing:

Type of property: nonresidential real property (i.e., a building or structural improvement) subject to Modified Accelerated Cost Recovery System (MACRS).

Location: placed in service in the U.S. or a U.S. territory.

Construction start: after January 19, 2025, and before January 1, 2029.

Placed in service: after July 4, 2025, and before January 1, 2031.

Use of the building: as an integral part of a qualified production activity (QPA). 

New construction: original use of the property generally must commence with the taxpayer. However, there is a limited exception for certain purchased used buildings that were not used in a qualifying activity between January 1, 2021, and May 12, 2025.

Improvements as separate property: improvements or additions to a building are treated as separate units of property and can independently qualify for QPP if their own construction and placed-in-service dates are within the eligibility window.

Leased property: Generally, lessors cannot claim QPP based on a lessee’s activities, but exceptions exist for consolidated groups and commonly controlled pass-through entities, allowing a “look-through” to the lessee’s QPA.

ADS ineligibility: property must not be required to be depreciated under the Alternative Depreciation System (ADS).

Election required: election to treat property as QPP must be made on a statement attached to a timely filed (including extensions) original tax return for the year the property is placed in service. This election is irrevocable except in “extraordinary circumstances.”

Can the entire building be expensed?

The deduction only applies to the portion of the building being used for QPAs. It does not apply to any portion of property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities.

Where property contains a mix of eligible and ineligible space, taxpayers may use the following reasonable methods to allocate the property’s unadjusted depreciable basis between eligible and ineligible space:

• Square footage
• Cost segregation data
• Architectural or engineering plans
• Process diagrams
• Construction invoices

If 95% or more of the property’s physical space meets the integral part requirement at placement in service, the taxpayer may elect to treat the whole property as eligible (de minimis rule).

An important caution – The 10-Year recapture rule

If, within 10 years, the property ceases to be used as an integral part of a QPA and is put to another productive use, the taxpayer may need to recapture the benefit as ordinary income under section 1245. A move from one QPA to another QPA, or temporary idleness due to maintenance or production upgrades, is not treated as a disqualifying change in use.

What businesses should do now

Businesses in manufacturing, refining, agriculture, and chemical sectors that are considering new plants, expansions, or major facility investments should start coordinating now across tax, fixed-asset, and operations teams so that qualifying space and costs are documented early. Since the election is made on the original return and can apply to all or only part of the eligible property, early planning matters.

If your business is planning a new production facility or expanding existing operations, the new QPP allowance could significantly accelerate tax benefits. Contact UHY’s Tax Practice to evaluate whether your project qualifies and how to structure it to maximize the available deduction.

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